Europe's growth problem (and what to do about it). Bruegel Policy Brief 2013/03, April 2013

The issue: The European Union's pre-crisis growth performance was disappointing enough, but the performance has been even more dismal since the onset of the crisis. Weak growth is undermining private and public deleveraging,and is fuelling continued banking fragility. Persistently high unemployment is eroding skills, discouraging labour market participation and undermining the EU’s long-term growth potential. Low overall growth is making it much tougher for the hard-hit economies in southern Europe to recover competitiveness and regain control of their public finances. Stagnation would reduce the attractiveness of Europe for investment. Under these conditions, Europe's social models are bound to prove unsustainable. Policy Challenge: The European Union's weak long-term growth potential and unsatisfactory recovery from the crisis represent a major policy challenge. Over and above the structural reform agenda, which vitally important, bold policy action is needed. The priority is to get bank credit going. Banking problems need to be assessed properly and bank resolution and recapitalisation should be pursued. Second, fostering the reallocation of factors to the most productive firms and the sectors that contribute to aggregate rebalancing is vital. Addressing intra-euro area competitiveness divergence is essential to support growth in southern Europe. Third, the speed of fiscal adjustment needs to be appropriate and EU funds should be front loaded to countries in deep recession, while the European Investment Bank should increase investment.

Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession. CEPS Working Document No. 394, March 2014

Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.

R&D, Spillovers, Innovation Systems and the Genesis of Regional Growth in Europe. Bruges European Economic Research (BEER) Papers 5/October 2006

Research on the impact of innovation on regional economic performance in Europe has fundamentally followed three approaches: a) the analysis of the link between investment in R&D, patents, and economic growth; b) the study of the existence and efficiency of regional innovation systems; and c) the examination of geographical diffusion of regional knowledge spillovers. These complementary approaches have, however, rarely been combined. Important operational and methodological barriers have thwarted any potential cross-fertilization. In this paper, we try to fill this gap in the literature by combining in one model R&D, spillovers, and innovation systems approaches. A multiple regression analysis is conducted for all regions of the EU-25, including measures of R&D investment, proxies for regional innovation systems, and knowledge and socio-economic spillovers. This approach allows us to discriminate between the influence of internal factors and external knowledge and institutional flows on regional economic growth. The empirical results highlight how the interaction between local and external research with local and external socioeconomic and institutional conditions determines the potential of every region in order to maximise its innovation capacity. They also indicate the importance of proximity for the transmission of economically productive knowledge, as spillovers show strong distance decay effects. In the EU-25 context, only the innovative efforts pursued within a 180 minute travel radius have a positive and significant impact on regional growth performance.

Determinants of Growth and Inflation in Southern Mediterranean Countries. MEDPRO Technical Report No. 10/March 2012

Despite significant economic reforms in many Southern Mediterranean EU neighbour countries, their growth performance has on average been subdued. This study analyses the differences in growth performance and macroeconomic stability across Mediterranean countries, to draw lessons for the future. The main findings are that Southern Mediterranean countries should benefit from closer ties with the EU that result in higher levels of trade and FDI inflows, once the turbulence of the ‘Arab Spring’ is resolved, and from the development of financial markets and infrastructure. They will also benefit in keeping inflation under control, which will depend in great part on their ability to maintain fiscal discipline and sustainable current accounts. One of the main challenges for the region will be to implement structural reforms that can help them absorb a large pool of unemployed without creating upward risks to inflation.

Institutions and Growth in Europe. CEPS Working Document No. 421, April 2016

This paper provides empirical evidence in support of the view that the quality of institutions is an important determinant of long-term growth of European countries. When also taking into account the initial level of GDP per capita and government debt, cross-country institutional differences can explain to a great extent the relative long-term GDP performance of European countries. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor long-term real growth performance. Interestingly, the detrimental effect of high debt levels on long-term growth seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The quality of national institutions seems to enhance the long-term GDP performance across a large sample of countries, also including OECD countries outside Europe. The paper offers some evidence that, in the presence of good institutions, conditions for catching-up seem generally good also for euro-area and fixed exchange rate countries. Looking at sub-groupings, it seems that sound institutions may be particularly important for long-term growth in the countries where the exchange rate tool is no longer available (and where also sovereign debt is high), and less so in the countries with flexible exchange rate regimes. However, this result is preliminary and requires further research. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular.

Poland and Greece - two contrasting EU enlargement experiences. ZEI Discussion Paper C213, 2012

The aim of this contribution is a comparative analysis of the challenges Poland and Greece (and more broadly – CEE-10 and GIPS countries) had to face in the past as latecomers to the European Union and are facing now, in the aftermath of the world financial and economic crisis of 2008-09. The main underlying message conveyed in this text is two-fold. Firstly, the author is going to argue that the breadth and complexity of the challenges Poland and other CEE-10 countries had to face while entering the road of systemic transformation was by far greater compared to past and in particular – current problems of Greece (and the remaining GIPS countries) in the aftermath of the global financial and economic crisis of 2008-09. Secondly, a resilience of Poland and other CEE-10 economies, relative to Greece and other GIPS, to the recent crisis was due to a comparatively higher level of institutional development of the former group at the time of their EU accession and at present. The ensuing discussion is organized as follows. Section 2 below provides comparative background information on the two reference groups. In Section 3 we discuss the most salient features of the design of the command economy and its legacy, as a key determinant of the initial conditions of systemic transformation. Next, in Section 4 we overview the basic indicators of growth performance and institutional reforms in CEE-10 countries between 1990 and 2011. Section 5 offers a picture of economic growth and real economic convergence in Greece and the remaining GIPS countries. In Section 6 we embark on comparative analysis of the institutional quality of Greece and Poland against a broader background of GIPS, CEE-10 and the remaining EU member countries. Section 7 concludes with a summary of major findings.

Breaking down the barriers to firm growth in Europe: The fourth EFIGE policy report. Bruegel Blueprint 18, 28 August 2012

Large firms contribute disproportionately to the economic performance of countries: they are more productive, pay higher wages, enjoy higher profits and are more successful in international markets. The differences between European countries in terms of the size of their firms are stark. Firms in Italy and Spain, for example, are on average 40 percent smaller than firms in Germany. The low average firm size translates into a chronic lack of large firms. In Italy and Spain, a mere 5 percent of manufacturing firms have more than 250 employees, compared to a much higher 11 percent in Germany. Understanding the roots of these differences is key to improving the economic performance of Europe’s lagging economies. So why is there so much variation in firm size in different European countries? What are the barriers that keep firms in some countries from growing? And which policies are likely to be most effective in breaking down those barriers? This policy report aims to answer these questions by developing a quantitative model of the seven European countries covered by the EFIGE survey (Austria, France, Germany, Hungary, Italy, Spain and the UK). The EFIGE survey asked 14,444 firms in those countries about their performance, their modes of internationalisation, their staffing decisions, their financing structure, and their competitive environment, among other topics.